India’s current account deficit is likely to widen to 1.6% of GDP this fiscal, driven by pick-up in domestic demand on the back of a better monsoon and upcoming pay hikes, says a Nomura report.

According to the global financial services major, the country’s domestic demand will pick up on the back of a better monsoon, 7th Pay Commission awards and the ongoing public capital expenditure plans.

“In our base case, we expect the current account deficit to widen to 1.6 per cent of GDP in FY17 from an estimated 0.9 per cent in FY16, owing to our view that domestic demand will pick up on the back of better monsoon, coming pay hikes and going public capex,” Nomura said in a research note.

CAD narrowed to 1.4 per cent in April-December, from 1.7 per cent in the corresponding period of 2014-15, on the back of contraction in trade deficit.

According to official data, exports declined by 6.74 per cent to $20.5 billion, registering the 17th straight month of fall in April, due to a sharp fall in shipments of petroleum and engineering products amid tepid global demand.

Imports too dropped by 23.1 per cent to $25.41 billion in the month under review as against $33 billion in April 2015.

Trade deficit in April more than halved to $4.84 billion compared with $11 billion in the same month last year.

Commenting on this data, the report said overall, the trade data paint a gloomy picture on both domestic and global demand.

“The broad-based weakness in non-oil imports is a worrying sign. After sluggish industrial output growth in March, the April import data suggest no turnaround in domestic demand yet,” the Nomura report said.